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03 February 2010

Winners and losers in the ETS

No other government did as well in Copenhagen as New Zealand. Unlike Barack Obama and the leaders of Western Europe, our negotiators returned from the climate change summit with major policy trophies in their bags. Was this because we had an all gases, all sectors ETS in place? If so, maybe it's time for Federated Farmers, the Greenhouse Policy Coalition, Business Roundtable and Greenpeace to eat crow.

In the run-up to the Copenhagen Climate Change Summit, a welter of lobby groups was telling the government that no legislation was better than imperfect legislation. Given that our negotiators needed the credentials that only ETS legislation could provide, maybe it's time for some of these lobbyists to eat crow. No other government did as well in Copenhagen as New Zealand.

Barack Obama and other western leaders came back empty handed. In contrast, environment minister Nick Smith, trade minister Tim Groser and their officials returned with two major trophies: support from 30 other countries for the NZ-initiated Global Research Alliance on agriculture greenhouse gases and tacit support for an agreement on forestry which addresses major NZ Kyoto Protocol concerns. And they did this without having to sign a massive cheque to anybody.

These initiatives are hugely important to New Zealand as the only developed country with an economy that's heavily reliant on a primary export sector that is also the main source of its emissions. Reducing emissions from livestock, allowing land-use flexibility and maintaining a market for forestry offsets will save the country billions.

The Global Research Alliance was largely a Groser initiative. The minister has a very good understanding of how consumer perceptions impact on the ability of NZ products to gain access to upmarket retail shelves around the world.

He's also aware that even if the governments of the world can't agree on a legally binding protocol to replace Kyoto, the economic imperative to reduce emissions won't go away. Affluent consumers want to buy ethical products and they already expect the Tescos, Waitroses and Home Depots of this world to include low-carbon footprints in their criteria for sourcing food, textiles and forest products.

Without its own legislated ETS, without credible targets, the chances of New Zealand having a say in the shape of the world's climate change response post-2012 were zilch. Yet it was critical that we did. Not only are we uniquely reliant on our primary industries, no other country relies almost totally on plantation forests for its wood supply or on renewable energy for its electricity supplies.

Australia doesn't have the same worries. Unlike us, its main challenge - reducing its overwhelming reliance on fossil fuels for energy - is shared by most of the industrialised world.

The failure of many of our major lobby groups to recognise these fundamentals was reflected in their submissions to government, in some case right through until the final ETS legislation took shape. Some of these stances may have been based, like those of Federated Farmers, on sheer bloody-mindedness. Others appear to have been more cynical, dressing up vested interests with cloaks of hollow reason.

With an economy that relies on the 100% Pure image, either to attract tourists or as a platform for selling our food and fibre to high-end consumer markets, New Zealand has never had the option of being a slow adopter. National recognised this and since well before the 2008 election was saying, "we are committed to having a moderated ETS with realistic targets in place in time for Copenhagen".

Yet the Greenhouse Policy Coalition still felt it could credibly argue
that “it is highly unlikely that any foreign consumer buys on the basis
of a country’s domestic climate change policies rather than in respect
of their views about a particular product.”

Farmers consistent during lobbying marathon

The first public consultation round – about whether New Zealand should
ratify the Kyoto Protocol – was in late 2001. Ever since, lobby groups
have been on a treadmill of submission, media release and letter
writing, attempting to bend public policy their way.

Farmers as a group have been consistent. They’ve been intransigently
opposed since day one. In his regular column in The Dominion Post,
former environment minister Simon Upton said Federated Farmers
“demagogic, destructive and illiterate source of commentary” was such
that “no self-respecting political party could take them seriously”.

There are two strands of logic at the heart of the federation’s opposition . The first is that it’s unfair to get farmers to pay a tax on animal
emissions before their competitors do. The second, essentially, is that
farmers have a right to pollute until measures are developed to mitigate
or prevent it at no cost to farmers.

The first argument is superficially attractive and was common to all
primary sector lobby groups when the country was contemplating ratifying
the Kyoto Protocol. However it ignores the importance that major retail
chains in developed countries accord to environmental footprints when
stocking their shelves.

It is one thing for our marketing people to rebut the inaccurate and
superficial logic surrounding food miles. But as consumers around the
world battle with carbon charges, it will be much harder to explain why New Zealand food exports – this country’s
largest source of emissions – are largely exempt.

The second argument, which was argued more eloquently – but not
necessarily more credibly – by Business NZ, is that the right to pollute
is a property right, “That compensation is generally owed to all
businesses who suffer a loss of value as a result of a new policy.”

Existing use rights are a feature of resource management law both in
New Zealand and in other developed countries. But those rights fall far
short of being absolute. Where these rights conflict with community or
national interests, such as pollution of the commons, they are normally
phased out, with no compensation paid.

Pulling the property rights card in this context undermines the debate we need to have about the lack of legal protection for
real property rights in New Zealand. Yet, intriguingly, many other
elements of BNZ’s submission on the ETS Amendment Bill in September were
both constructive and well argued.

Overall, the tone contrasted with its submissions of earlier years and
showed a much higher level of political sophistication than Federated
Farmers. Sometime in 2008 Business NZ clearly decided the writing was on
the wall and moved from a stance of outright opposition to the ETS, to
one of trying to moderate the impact of the ETS on business when it
became law.

Its 2007 argument had been that New Zealand should not adopt a price on
carbon, “either through a carbon market mechanism or carbon charges,
unless our major trading competitors, including all major developing
countries, take a similar step.”

By 2009 it was arguing for the Labour Government’s ETS to be replaced
with an uncapped intensity-based scheme to protect ‘at risk’ businesses.
It wanted a slower phase-out of industry support and delayed sector
commencement dates.

By and large the amended ETS delivers exactly that – on the face of it,
an excellent outcome for Business NZ’s membership. In contrast,
Federated Farmers got little of what it asked for.

Few successes for big business emitters

The Greenhouse Policy Coalition, which represents the large emitters,
also strongly advocated for an intensity-based scheme for large
trade-exposed energy users. This win is worth tens of millions of
dollars for some of the coalition’s backers from the Major Electricity
Users Group.

Otherwise, its policy successes are thin on the ground. Until the end it
was arguing for the suspension of the ETS “until a better designed
scheme can be created” and for the exclusion of agriculture “until
agriculture around the world faces a price on carbon or the sector has
options to reduce carbon dioxide emissions that are affordable and that
can be widely deployed”.

The Business Roundtable can’t be said to have had many exclusive wins
either. However its recommendation, that initial government action
should be modest and ‘ramped up’ over time if technological
breakthroughs make carbon reduction more affordable, mirrors much
government thinking.

The Roundtable was opposed to the adoption of a climate change strategy
until a post-2012 international agreement was reached and action taken
by other countries, particularly Australia and the United States. Even
then, it wanted a low revenue-neutral carbon tax with subsidies for
carbon sinks for a transitional period … something it had opposed when
Labour originally suggested a similar concept.

This apparent disjoint with its free market principles was
counterbalanced by the Roundtable’s staunch defence of the owners of
pre-1990 forests, who face a 100% tax on emissions (less token
compensation) if they fail to replant following harvest. The contrast
with farmers, who enjoy 100% grand parenting of their livestock
emissions until 2015 and thereafter a 90% taxpayer subsidy on their
post-2005 emissions growth, couldn’t be more marked.

Business NZ, the Greenhouse Policy Coalition and forest industry
organisations all opposed the deforestation tax, or argued for
offsetting, as did National in its 2008 election policy – subject to
weasel words about cost implications. But most pre-1990 forest land is
owned by large low profile organisations that can be easily disregarded
by a government trying to boost its Kyoto ledger or avoid a credit
downgrade.

Only when low profile becomes high profile, do the politicians sit up
and take notice. The Feds with their anti-fart tax campaign and the
forest industry with its campaign to allow owners of Kyoto forests
(planted post-1989) to participate in the ETS are the only cases where
Labour was willing to contemplate major changes to its version of the
ETS.
Unlike other business groups, the NZ Business Council for Sustainable
Development (NZBCSD), supported an ETS involving all
gases and all sectors from the kick-off. As a result it has an impressive number of policy
wins to its credit.

Its greatest success, however, was in moving many businesses from an
attitude of denial and ‘do nothing’ to one of constructive engagement
with something that was about to become a reality. It also helped build
acceptance among businesses and the major political parties that an ETS
would be more effective than a low level carbon tax in delivering the
emission reductions required.

However, any hopes that it would achieve cut-through with the public
appear to have been groundless. Since Kyoto became a buzzword, the TV
news channels have refused to engage with the climate change debate at
anything more than a bumper sticker level.

On both sides of the Tasman, the public supports the notion that big
business should reduce its emissions, so long as the public doesn’t end
up paying for it through increased prices. Clearly there is little
understanding of how a carbon pricing mechanism works.

Farmers’ featherbed not as thick as it appears

Of all business and primary sector groups, the NZBCSD was the most gung
ho about the inclusion of farming in an ETS. However, it went too far
for Fonterra and some of its other corporate members when it released
research that showed that a large majority of the public were unhappy
with National’s ETS changes. These would make taxpayers pick up a bigger
tab for emissions from trade-exposed energy intensive businesses and
farmers.

These changes were widely criticised by the Left and by environmental
groups led by Greenpeace, for weakening Labour’s ETS. Commentator Rod
Oram went further, saying the changes were a “shambles” that made an
“utter mockery” of the ETS.

They were wrong. The desperate last minute deal struck with the Maori
Party to get the legislation through the House, certainly deserved those
descriptors. But as for the substance of the amendments, the critics
protest too much.

Meat, wool and dairy processors will pay significant emissions charges.
Fonterra estimates this will cost them an extra $115 million a year by
2015, a cost that will be sheeted home to farmers, if the government
sticks to its timetable.

The energy sector will be liable for 50% of its total GHG emissions
between 2010 and 2012, and for 100% of its total emissions from 2013
onwards. After providing free credits for trade-exposed energy intensive
industries, the government estimates that industry will need to buy 32
million NZ emissions units each year. At a conservative $25 a tonne,
that’s $900 million a year – hardly an insignificant sum.

Whether this, along with emission charges on
agriculture that begin in 2015, will be sufficient for New Zealand to meet its (conditional)
target of a 10-20 per cent reduction in 1990 emission levels by 2020
remains to be seen.

As the Greenhouse Policy Coalition points out, “The high percentage of
renewable electricity generation, the high percentage of agricultural
emissions, and [with many] industrial emitters already near “world’s
best practice” in energy efficiency, means mitigation options are very
limited and will be high cost.” In its 2007 publication, Framework for a
New Zealand Emissions Trading Scheme, the Ministry for the Environment
said much the same thing.

In this context, Greenpeace’s call for a 40% reduction target (in 2008
it was calling for a 30% reduction) was akin to asking New Zealand to
commit economic suicide. Clearly it couldn’t be achieved without a
dramatic reduction in emissions from the country’s largest source of
emissions, livestock farming. So let’s give them full marks for honesty –
their recipe for low input, low intensity farming would undoubtedly
result in a dramatic reduction in emissions. It would also mean the end
of the dairy industry as we know it, while being the death knell for
sheep farming (the biggest source of farm greenhouse gas emissions).

The Sustainability Council has been pushing for farmers to take full
responsibility for their emissions. Its case has been based on a belief
that farming has a greater potential to reduce emissions than any other
sector, simply through applying nitrogen inhibitors to pasture.
In practice, many farmers have found these products do not live up to
the hype, a conclusion that has been confirmed by independent
fertiliser expert Dr Doug Edmeades. In a study released late last year
he says inhibitors have been over-promoted and that many claims made
about them are unsubstantiated.

The global warming potential of nitrous oxide is nearly 300 times that
of CO2. So if inhibitors that work can be effectively deployed they may
be something of a silver bullet for reducing the country’s carbon
footprint. But the operative word is ‘if’.

Also, with no technology available yet for reducing methane emissions
from livestock digestion, the government’s decision to ease
agriculture’s entry into the ETS is commonsense. Getting farmers to pay
significant sums for emissions before they have a practical means of
reducing them would achieve nothing. Time is also needed to develop
practical ways of making individual farms responsible for their
emissions performance.

In the meantime, along with all other Kiwis, farmers will be paying
their share of energy-related emission charges. Big fuel
users, like arable farmers and greenhouse growers, will be hit in the pocket –
unless of course these price signals reveal that some farming sectors do
have the ability to reduce their emissions after all.

In the second half of 2010, the government is likely to fine-tune the
ETS when domestic carbon trading begins and legal anomalies inevitably
emerge.

Although nearly all business lobbyists have called for both major
political parties to deliver policy consistency, the reality is that the
ETS is not written on tablets of stone. Reshaping New Zealand into a
low-carbon economy is one of the most fundamental economic changes we
will see in our lifetimes. Expecting the democratic political process to
get it right first time round, given the host of technical, economic
and political unknowns, is unrealistic.

More ETS changes to come

The general public will also drive change. As ordinary Kiwis become
aware of the costs to them of free emission credits to industry, they
won’t tolerate feather-bedding where the technology exists to reduce
emissions. So if and when proven methane and nitrous oxide reduction
technologies come on stream, livestock farmers should expect to lose
their free emissions more quickly than the ETS now provides for.

Ignored by Nick Smith has been the call from many lobby groups for an
independent agency reporting directly to parliament to regulate the ETS.
This call will become harder to resist, as awareness grows of the
potential for graft and political favouritism to influence the
allocation of ‘free’ carbon credits.

The government’s fixation with aligning the ETS with Australia’s Carbon
Pollution Reduction Scheme will also come under increasing pressure.
While the government is justified in wanting to prevent businesses from
migrating to Australia in order to avoid higher carbon costs here, there
appears to have been no analysis of the sectors where this leakage
might occur.

While there is no logic in making our ETS different from Australia’s
CPRS just for the sake of it, the New Zealand and Australian economies
and emission profiles are like chalk and cheese. Labour’s Charles
Chauvel points to Treasury’s conclusion that there is “no clear
analytical basis” to align the ETS with the currently proposed CPRS,
given New Zealand and Australia’s unique emissions profiles and
industrial structures.

Even uncapped intensity-based allocations – one of the major changes
introduced by National to align the ETS with Australia – may need to
change if they fall foul of the emissions trading schemes of other
countries. Parliamentary Commissioner for the Environment Jan Wright
points out that under the Kerry-Boxer Bill being considered by the
United States senate, credits from countries ‘not subject to [..]
mandatory absolute tonnage limits’ do not qualify under their scheme.
“This means that, by aligning with Australia on the lack of an
allocation cap, New Zealand may rule out the United States as a possible
market for New Zealand credits.”

Indeed, to maximise the credibility of our ETS the government should be
focussing on what the US and Europe are doing.

The other area where there will be unceasing pressure for change is the
treatment of pre-Kyoto forests. Unless the grossly unfair treatment of
those who have invested in pre-1990 forests is remedied, it will reduce
their ability and willingness to plant the new carbon forests the
country so badly needs.

This is recognised in the clunky deal National negotiated with the Maori
Party in which a handful of iwi won compensation for the massive
contingent liabilities imposed on the Kyoto forests acquired as part of
their Treaty settlements. The fortunate few have said they have an
interest in seeing this treatment extended to all other pre-Kyoto forest
owners. We’ll see.

Labour climate change minister David Parker deserves credit for laying
an essential, albeit unsustainable, foundation for the ETS, said Simon
Upton in The Dominion Post.

“Nick Smith had a much tougher task. Environment ministers in
conservative governments have a much harder row to hoe. His is no small
achievement … the ETS ensures that emissions will now be measured,
recorded and verified. They will at the margin be reduced. But this is
by no means the final shape of things to come.”

In early 2009 the Greenhouse Policy Coalition’s Catherine Beard said
plaintively in a letter to Smith, “We are very concerned that the
setting of an [emissions] target for New Zealand does not degenerate
into who came up with the punchiest sounding slogan for the media.”

The same concern could be expressed about ETS policy in general. But for
this to happen, it would be helpful if the Coalition and all lobby
groups recognised the strategic importance of New Zealand to be
perceived in world markets as an ethical producer of food, fibre and
forest products and framed their advocacy accordingly.

It would also be helpful if the government was more effective at
communicating its big picture policy objectives to the public. Although
National was committed to having a moderated ETS with realistic targets
in place in time for Copenhagen, its poor communications allowed doubts
to be raised about its resolve.

The views expressed in this article are Trevor's own, not
those of any of his clients

What do you think?

Michael Cambridge
Hi Trevor,
A very interesting summary. I have been a member of Federated Farmer, until recently, to try to get farmers to see the positive aspects of the ETS. If 650,000 hectares was planted on farm land since 1990, then another 650,000 could easily be planted if the price of carbon is right. I suggest that farmers in general would benefit more from a high price than a low price. There would be a great deal of interest in tree planting if CO2 hit $100 per tonne. It is quite funny watching some of them agonising over whether they should accept the credits they already qualify for. For one, it would increase his net income several times even though he is an Act supporter and adamant denier of climate change.
Regards
Michael

Treehugger
One difference I have with your "Govt wins in Copenhagen " article is that, in my view, the meeting was a (predictable) shambles and failed to produce anything tangible whatsoever.
The US, for example, will not sign and will never sign.
Lap-dog Australia will follow the US. Infra-Lapdog NZ will eventually follow Australia. In other words, my prediction is that - despite the fact that ETS is now NZ law - John Key will use the chaos in Aus/US to indefinitely postpone the obligations faced by our emitting sectors.
I have been advising people of my views in the course of my business (my views are based on my own experience of COP1, and 40 years of reading the literature on the subject, but not on anything I could hold up in a court of law). Naturally, I would be more than happy if events were to prove me totally wrong. But if I am right, I wonder about the legal/social
implications of all that genuine currency exchanged for meaningless carbon credits.

Trevor
You may well be right about what the government does. Maybe not. I see some EU states are talking about imposing duties next year on imports that come from countries that don't have an ETS. I don't see that an internationally binding treaty is necessary anyway — a possibly more important driver will be what Maceys, Walmart, Homestore and the like do with their commitments to ecosourced procurement. Maybe the grey market will evolve into a new form of international eco-exchange, based on standards that are credible to producers, retailers, consumers and those governments who want to take part.

What do you think?Feedback about items in WHAM Hits is welcome, within the contraints of civilised dialogue. Limit: 300 words.